A New Look at How Governments Should Sell Their Debt
A recent study by Marek Pycia and Kyle Woodward, published in the Journal of Political Economy, shows that pay-as-bid auctions have a clear advantage.
There are many ways to sell large quantities of goods to multiple buyers at once. For example, you can ask everyone to pay exactly what they bid ("pay-as-bid"), or you can ask everyone to pay the same price, such as the lowest price among the winning bids ("uniform-price"). Governments and central banks rely on exactly these two formats to sell trillions of dollars in treasury securities and other assets every year, yet for a long time it was unclear which format actually serves the seller best, and how each should be designed.
Intuitively, uniform-price auctions might seem more attractive: no bidder ends up paying more than another. But which format truly raises more money, and how should a seller structure the amount of the good put up for sale?
A new study by Marek Pycia and Kyle Woodward, published in the Journal of Political Economy, shows that pay-as-bid auctions have a clear advantage. The authors prove that bidders in pay-as-bid auctions always have exactly one rational bidding strategy, whereas uniform-price auctions can support many different rational strategies at once, which makes their outcomes considerably harder to predict or control. Building on this, they show that a seller running a pay-as-bid auction maximizes revenue by committing in advance to a fixed, publicly known supply, and by fully disclosing all available information about that supply beforehand. In uniform-price auctions, by contrast, the same principle does not hold: withholding information about supply can benefit the seller instead. Across a wide range of settings, pay-as-bid auctions generate at least as much revenue as optimally designed uniform-price auctions, and often more.
Marek Pycia’s website